Econ Exam 2 practice questions

question

A price taker faces a demand curve that is:

answer

horizontal at the market price

question

A variable factor of production is variable:

answer

in both the long and short run

question

When more firms enter and industry:

answer

the industry supply curve will shift right

question

A fixed factor of production is fixed:

answer

only in the short

question

The price equals marginal cost rule for profit maximization is a specific example of which core principle?

answer

The Cost-Benefit Principle

question

What will cause an increase market supply?

answer

A technological innovation that lowers the marginal cost of producing the good.

question

Even when a firm produces the level of output at which price equals marginal cost, it should shut down if its total revenue is less than its:

answer

fixed costs

question

If a firm shuts down in the short run, then its:

answer

economic loss will equal its fixed costs.

question

One reason that variable factors of production tend to show diminishing returns in the short run is that:

answer

there is only so much that can be produced using additional variable inputs when some factors of production are fixed.

question

Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good, what should the firm do?

answer

The firm should shutdown if its total revenue is less than its variable cost.

question

Suppose that at a firm's profit-maximizing level of output, its total revenue is $1,250, the total cost of its variable factors of production is $1,000, and its total fixed cost is $500. This firm will ______ in the short run, and will ______ in the long run.

answer

not shut down; exit the industry

question

Suppose a perfectly competitive firm is producing 37 units output, and the marginal cost of the 37th unit is $3. If the firm can sell each unit of output for $5 and the firm's revenue is sufficient to cover its variable cost, the firm should:

answer

increase production

question

The phrase "smart for one, but dumb for all" refers to the idea that the individual pursuit of self-interest:

answer

doesn't always lead to an efficient outcome.

question

Which of the following statements about explicit costs is true?

answer

They appear on the firm's balance sheet.

question

A situation is efficient if it is:

answer

not possible to find a transaction that will make at least one person better off without harming others.

question

Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by:

answer

the actions of independent, self-interested buyers and sellers.

question

Adam Smith's theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ______ lead to the most efficient allocation of resources.

answer

often

question

Explicit costs:

answer

measure the payments made to the firm's factors of production.

question

If a firm is earning zero economic profit, then:

answer

the firm's accounting profit is equal to the firm's implicit costs.

question

Efficiency is an important goal because when markets are efficient:

answer

there are more resources available to achieve other goals.

question

If the firms in a market are earning an economic profit, then, in the long run, the market ______ curve will shift to the ______.

answer

supply; right

question

Subsidies are most likely to:

answer

reduce total economic surplus.

question

Professor Plum, who earns $100,000 per year, read in the paper today that the university pays its basketball coach one million dollars per year in exchange for his agreement to remain at the university for at least three more years. The coach earns more than Professor Plum because:

answer

the coach is able to earn economic rent due to his unique talents.

question

he monopolist will maximize profits at the output level for which:

answer

marginal revenue equals marginal cost.

question

Economies of scale arise from:

answer

increasing returns to scale

question

The primary objective of an imperfectly competitive firm is to:

answer

maximize profit

question

Monopolists use the hurdle method of price discrimination in order to:

answer

separate consumers on the basis of their reservation prices.

question

Price discrimination means charging:

answer

different prices to different buyers for essentially the same good or service.

question

A natural monopoly is a monopoly that arises from:

answer

economies of scale.

question

Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below.

Acme Manufacturing: TC = 100 + 3Q.
Generic Industries: TC = 500 + 3Q.

Which of the following statements is true?

answer

Acme and Generic have the same marginal cost.

question

What is NOT an example of a good with network economies

answer

A computer printer

question

In exchange for a share of the revenues earned on campus, State U has granted CheapFizz the exclusive right to sell soft drinks in the student union and in vending machines on campus. Prior to the deal, three soft drink companies sold beverages on campus; now no other soft drink company is allowed to sell its products on campus. Prior to the deal, a 12-ounce can of CheapFizz sold for 75 cents. After the deal you would expect a 12-ounce can of CheapFizz to sell for:

answer

more than 75 cents because CheapFizz is the only company that can sell soda on campus.

question

A decision tree is used when modeling:

answer

games in which timing matters

question

OPEC is an example of a:

answer

cartel

question

In the Nash equilibrium of a prisoner's dilemma:

answer

there is unrealized opportunity for both to gain.

question

Game theory is not useful in understanding perfect competition because in a perfectly competitive market:

answer

no single firm can influence the market price, so firms' decisions are not interdependent.

question

The use of psychological incentives to solve commitment problems would be least effective in games played:

answer

once between strangers.

question

As price increases, firms in a perfectly competitive market find that it is:

answer

beneficial to produce more units of output.

question

If a production process exhibits diminishing returns, then as output rises:

answer

marginal cost will eventually increase.

question

Which of the following is the most likely to be a fixed factor of production at a pizza restaurant?

answer

The size of the seating area

question

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

answer

if the firm increases its price above the market price, it will earn zero revenue.

question

he accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive.

answer

curve A above curve C.

question

An example of an implicit cost is:

answer

the value of a spare bedroom turned into a home office.

question

Economic profit is equal to:

answer

total revenue minus the sum of explicit and implicit costs

question

A cost-saving innovation in a perfectly competitive industry will lead to:

answer

economic profits for a few firms for a short time.

question

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment.
Pat's explicit costs are ______, and Pat's implicit costs are ______.

answer

$16,000; $35,000

question

Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.

answer

rise; fall

question

An imperfectly competitive firm faces a demand curve that is:

answer

downward sloping

question

If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____.

answer

more than double.

question

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 100 t-shirts, your average total cost is ______.

answer

$13

question

If a natural monopoly increases the quantity of output it produces, then:

answer

its average cost will decrease.

question

If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:

answer

increase output until marginal revenue equals marginal cost.

question

Game theory provides tools that are used to model:

answer

strategic interdependencies.

question

The dilemma in a prisoner's dilemma is that:

answer

the players would be better off if they both played a dominated strategy.

question

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900.

For both Joe and Sam, ______ is a ______.

answer

cutting the price to $2.90; dominant strategy

1 of 55

question

A price taker faces a demand curve that is:

answer

horizontal at the market price

question

A variable factor of production is variable:

answer

in both the long and short run

question

When more firms enter and industry:

answer

the industry supply curve will shift right

question

A fixed factor of production is fixed:

answer

only in the short

question

The price equals marginal cost rule for profit maximization is a specific example of which core principle?

answer

The Cost-Benefit Principle

question

What will cause an increase market supply?

answer

A technological innovation that lowers the marginal cost of producing the good.

question

Even when a firm produces the level of output at which price equals marginal cost, it should shut down if its total revenue is less than its:

answer

fixed costs

question

If a firm shuts down in the short run, then its:

answer

economic loss will equal its fixed costs.

question

One reason that variable factors of production tend to show diminishing returns in the short run is that:

answer

there is only so much that can be produced using additional variable inputs when some factors of production are fixed.

question

Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good, what should the firm do?

answer

The firm should shutdown if its total revenue is less than its variable cost.

question

answer

not shut down; exit the industry

question

answer

increase production

question

The phrase "smart for one, but dumb for all" refers to the idea that the individual pursuit of self-interest:

answer

doesn't always lead to an efficient outcome.

question

Which of the following statements about explicit costs is true?

answer

They appear on the firm's balance sheet.

question

A situation is efficient if it is:

answer

not possible to find a transaction that will make at least one person better off without harming others.

question

Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by:

answer

the actions of independent, self-interested buyers and sellers.

question

Adam Smith's theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ______ lead to the most efficient allocation of resources.

answer

often

question

Explicit costs:

answer

measure the payments made to the firm's factors of production.

question

If a firm is earning zero economic profit, then:

answer

the firm's accounting profit is equal to the firm's implicit costs.

question

Efficiency is an important goal because when markets are efficient:

answer

there are more resources available to achieve other goals.

question

If the firms in a market are earning an economic profit, then, in the long run, the market ______ curve will shift to the ______.

answer

supply; right

question

Subsidies are most likely to:

answer

reduce total economic surplus.

question

answer

the coach is able to earn economic rent due to his unique talents.

question

he monopolist will maximize profits at the output level for which:

answer

marginal revenue equals marginal cost.

question

Economies of scale arise from:

answer

increasing returns to scale

question

The primary objective of an imperfectly competitive firm is to:

answer

maximize profit

question

Monopolists use the hurdle method of price discrimination in order to:

answer

separate consumers on the basis of their reservation prices.

question

Price discrimination means charging:

answer

different prices to different buyers for essentially the same good or service.

question

A natural monopoly is a monopoly that arises from:

answer

economies of scale.

question

answer

Acme and Generic have the same marginal cost.

question

What is NOT an example of a good with network economies

answer

A computer printer

question

answer

more than 75 cents because CheapFizz is the only company that can sell soda on campus.

question

A decision tree is used when modeling:

answer

games in which timing matters

question

OPEC is an example of a:

answer

cartel

question

In the Nash equilibrium of a prisoner's dilemma:

answer

there is unrealized opportunity for both to gain.

question

Game theory is not useful in understanding perfect competition because in a perfectly competitive market:

answer

no single firm can influence the market price, so firms' decisions are not interdependent.

question

The use of psychological incentives to solve commitment problems would be least effective in games played:

answer

once between strangers.

question

As price increases, firms in a perfectly competitive market find that it is:

answer

beneficial to produce more units of output.

question

If a production process exhibits diminishing returns, then as output rises:

answer

marginal cost will eventually increase.

question

Which of the following is the most likely to be a fixed factor of production at a pizza restaurant?

answer

The size of the seating area

question

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

answer

if the firm increases its price above the market price, it will earn zero revenue.

question

he accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive.

answer

curve A above curve C.

question

An example of an implicit cost is:

answer

the value of a spare bedroom turned into a home office.

question

Economic profit is equal to:

answer

total revenue minus the sum of explicit and implicit costs

question

A cost-saving innovation in a perfectly competitive industry will lead to:

answer

economic profits for a few firms for a short time.

question

answer

$16,000; $35,000

question

answer

rise; fall

question

An imperfectly competitive firm faces a demand curve that is:

answer

downward sloping

question

If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____.

answer

more than double.

question

answer

$13

question

If a natural monopoly increases the quantity of output it produces, then:

answer

its average cost will decrease.

question

If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should:

answer

increase output until marginal revenue equals marginal cost.

question

Game theory provides tools that are used to model:

answer

strategic interdependencies.

question

The dilemma in a prisoner's dilemma is that:

answer

the players would be better off if they both played a dominated strategy.

question

answer

cutting the price to $2.90; dominant strategy

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